A key theme at Vision 2012, IBM’s three-day user conference for Finance and Risk professionals, is how organizations can leverage enterprise risk information to make better decisions while balancing the demands for risk oversight and regulatory compliance.

The current complex and dynamic regulatory environment is a particular challenge for risk and compliance directors.For instance, while organizations covered by Dodd-Frank must respond to current regulatory reporting requirements, less than a third of the associated rule-making has been finished.

So, risk and compliance professionals must put in place an approach to meet regulatory requirements that can easily adapt over time as regulations evolve, and this approach includes the capability to adapt internal policies to keep pace with the evolving regulatory environment.

This new solution enhances the ability to make risk-aware business decisions, enables companies to react more quickly to regulatory changes through better policy management, and decreases costs and complexity of compliance.

Leveraging the IBM Cognos business intelligence platform, OpenPages 6.1 delivers interactive reports and dashboards that allow business managers to turn that risk information into insight and insight into better business outcomes.

Visionis IBM’s global conference for finance and risk professionals to help improve planning, budgeting and forecasting, identify and mitigate risk, and meet the demanding requirements of XBRL, IFRS, Basel II and Solvency II with greater confidence.

I talked to Mauboussin about his book, making data-driven decisions, some common pitfalls as decision makers, and his upcoming talk at Vision.

“What's very exciting is that in the last half dozen years, we've had a real influx of data, and we're now just learning how to tap that data for the benefit of better decision making,” said Mauboussin. “Now we can create a better intersection between value creation and making decisions.”

The problem however, according to Mauboussin, is that we still have the same cognitive makeup and the propensity to make common mistakes.

“We often think about our own decision making as being objective and fact based and rationale. And we tend to underestimate systematically how important the social context is for our decision making,” said Mauboussin.

To illustrate this point he told an interesting story from his book.

Researchers went into the wine section of a supermarket and set up French and German wines next to each other that were roughly matched in price and quality. Over a two week period they alternated playing distinctively French and distinctively German music to see if it would have any influence on purchase decisions.

Surprisingly, they found when French music played people bought French wine 77 percent of the time, and German wine 73 percent of the time when German music played. When asked if music affected their selections, the consumers unanimously said no.

“This basic experiment can be extrapolated to a lot of organizational settings where we think of ourselves as trying to be conscious and mindful as we make decisions. But indeed what is going on around us can be deeply influential to our decisions,” said Mauboussin.

So what do we do?

According to Mauboussin, integrate more data into quality decisions. However, there is still a tension between the intuitive, go by the seat of the pants experience group versus the analytically-minded group.

“Either extreme is not going to work but a blend between the two is right way,” said Mauboussin.

Read the rest of the interview with Michael Mauboussin on the Business Analytics Blog here.

IBM Watson goes
to work in financial services as a risk expert. One of the largest Financial
Services institutes and IBM now partner to enhance and simplify the consumer
banking experience with faster, more accurate decisions, better risk
assessment, and more targeted customer offers.

IBM Watson is
transforming expectations for how technology can help individuals live and work
in better ways. Its ability to make sense of vast quantities of unstructured
information, communicate in natural human language, learn from experience, and
offer confidence weighted responses is already a game changer in healthcare. Focusing
these capabilities on financial services brings new possibilities for higher
service levels to an expanded set of users.

For those who do
not know IBM Watson, Watson is an artificial intelligence computer system
capable of answering questions posed in natural language, developed in IBM's
DeepQA project. As a test of its abilities, Watson competed on the quiz show
Jeopardy!, in the show's only human-versus-machine match-up to date. In a
two-game, combined-point match, broadcast in three Jeopardy! episodes February
14–16, Watson beat Brad Rutter, the biggest all-time money winner on Jeopardy!,
and Ken Jennings, the record holder for the longest championship streak (74
wins).

Now what will
that bring to our Financial Service clients? Potentially as an assistant to
client service professionals to help deliver evidence-based recommendations
across multiple areas of the bank, including: credit card; private banking;
wealth management; and call centers. Since IBM Watson can think faster than any
human being it is able to make cross checks, prevent fraud, determine risk,
etc. It is able to analyze data such as client information, online news
reports, blogs, Twitter feeds, analyst reports, regulations, credit ratings,
and government securities filings which can help to suggest options targeted to
a consumers' individual circumstances.

Last year IBM acquired OpenPages as a strategic move into the area of Governance, Risk and Compliance. The lasest announcement to acquire Algorithmics (quantitative risk management) shows the continuous commitment of IBM in the GRC market. GRC software will integrate into the Business Analytics Software group, the area where the former acquisitions like Cognos, SPSS and Clarity systems already resides.

Now that Risk Management is evolving, more and more organizations are starting an enterprise approach to risk management. And this is where I see the need for Risk and Performance Management convergence.

In past Risk Management implementations I see that a major portion of time and budget was spent on Risk Reporting and Dashboarding. Especially the need for self service reporting, where users can ad hoc create their own risk reports, is growing. We do not want to wait in the queue waiting for our report to be created. 2 days later you missed the opportunity to respond and the loss is there.

With this self service capability the question automatically pops up 'can I trust my data'. And now we are back in the area of data governance. This is exactly where the area of Performance Management is today.

Apart from these reporting and dashboarding capabilities Enterprise Risk Management means alignment of risks and controls to the strategic initiatives of the organization. What will prevent me from reaching my business goals? Isn't this defined as a risk? And how will we prevent this from happening? Wasn't that defined as a control?

Even more interesting are questions like, 'What if I was able to perform risk scenario planning?', 'What if I could predict risks from happening?' or 'What is the correlation between the risks that have materialized?'.

And there is the proof that Risk Management and Performance Management have lots in common and should be integrated. Lets call it Business Analytics.